Bebo Buy Silly, AOL Screwed

After a day to consider AOL's Bebo acquisition (TWX), we're ready to deliver a more definitive verdict: We don't get it.

Our concerns?

Bebo is (relatively) strong internationally, where AOL is weak. The idea, presumably, is that the companies' strengths will complement one another. Unfortunately, the companies' strengths aren't that strong: AOL is a distant 3rd in the US market, and Bebo is not even No. 1 in its strongest market, the UK. The most likely outcome of putting the two companies together, therefore, is that the companies' weaknesses complement each other. And they go down together.

In social networking, as in Glengarry Glen Ross, "first prize is a Cadillac Eldorado, second prize is a set of steak knives, third prize is you're fired." Bebo has been able to hold its own in a few markets, but as the social-networking game matures, the spoils will increasingly go to Facebook and MySpace. Bebo, meanwhile, will be left fighting for crumbs. (Lycos, anyone? Excite?)

Paying all cash might have been smart from a financial perspective (dilution), but it will only ensure that Bebo executives hit the road. And they'll be following a lot of the remaining strong AOL execs out the door.

The AOL-Bebo merger is the 2008 analog of Terra-Lycos. Tie two bricks together, and they still don't...

After its AOL division paid out an insane $850 million for social
networking site Bebo yesterday, one had to wonder if the true digital
legacy of Time Warner will be as the perpetual gravy train for legions
of Web players....

And after interviewing numerous sources close to the company
yesterday after the Bebo deal was announced, I am even more certain of
more trouble ahead:

1) AOL essentially just forked over all that money for an audience of
primarily teenagers in England.

2) Sources close to the company say AOL CEO Randy Falco and
President Ron Grant–who are none-too-lovingly called Burns and Smithers
at AOL–kept the deal a relative secret from most other execs, including
those who might be majorly impacted.

3) Sources said Falco had repeatedly told execs at AOL that he had
to do a “big property” acquisition to move the needle, which has not
been exactly moving at the unit of late, in order to show Wall Street
that AOL had a social networking strategy. “It’s like constantly
scrambling eggs, by doing big new moves, you can hide the problems,”
said one exec.

4) The turmoil in its online advertising unit, dubbed Platform A
back in the fall, is real and profound and extraordinarily troublesome,
given it is supposed to be the engine to make the Bebo financial
projections work at AOL.

5) Perhaps most importantly, it remains a mystery to me and many
others I talked to yesterday that AOL has not truly attempted to take
its very powerful properties like AIM and ICQ and make them more
social, building applications on top of already robust ones and
partnering around the Web. “Didn’t AOL invent the social graph with Buddy Lists?” said one perplexed Silicon Valley luminary to me. Yes, indeedy, it did. Thus, I am still trying to figure out why AOL–which was built on the
pillars of community, communications and connectivity–has consistently
not been able to leverage its still-valuable assets.

If new Platform A CEO Lynda Clarizio can successfully integrate Tacoda, Quigo, et al, into Advertising.com, AOL will have at least one powerful, valuable asset that it could sell or spin off. The rest of the company, we think, will continue to disintegrate (now including Bebo).

The good news is that, in this case, "disintegrating" isn't all bad. AOL has a lot of valuable properties buried within the dying whole. Freeing these properties will actually be good for the properties, and it will also likely be good for Time Warner shareholders. But in the meantime, it seems, we have a lot more pain to go.

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Bebo Buy Silly, AOL Screwed

After reflecting on AOL's Bebo acquisition for a day, we're ready to render a verdict: We don't get it. The companies weaknesses will complement each other, and the combination will likely help drag the whole down.